We continually strive to improve the quality and relevance of Massmart’s financial reporting to our stakeholders. In doing so, we ensure that our technical accounting disclosure remains of the highest standard, while also endeavouring to keep the details and our explanations clear and simple despite many accounting standards becoming increasingly complex and technical. Our efforts have been recognised in the Ernst & Young Excellence in Corporate Reporting Awards where Massmart has received an Excellent rating for the past five years and came fourth nationally in the recent 2009 awards.

Guy Hayward
Chief Financial Officer

Key issues in the 2010 financial year:

  • Accelerating sales growth from December 2009
  • Low product sales inflation
  • Effective cost control
  • Good inventory and working capital management
  • Highest ever capital expenditure and investment levels


Almost all of the acquisitions concluded during the financial year, none of which were material, were part of our Retail Cash & Carry expansion in Masscash. Massbuild, specifically Builders Express, acquired three ex-Mica stores, two of which are in KwaZulu-Natal and one in Johannesburg. In aggregate, 13 businesses, representing 20 stores and properties, were acquired for a cash consideration of R369.9 million, which was financed using short- and medium-term debt facilities, and gave rise to goodwill of R305.8 million. Further to these acquisitions, the remaining 49% minority interest in the Durban-based business, Cambridge Food, was acquired, in which the initial 51% was acquired in December 2008. The relating cash flow and other minority interests acquired is reflected in Other investing activities including minority interests acquired in the statement of cash flows.


With effect from May 2010, the cell phone contract business of CellShack in Masscash was sold for cash. The proceeds and effect of this disposal are not material.


There were no significant changes in accounting policies during the year.

Read more

More detail on the accounting policies can be found here

Group Financial Statements

Since 2007, the results for Makro Zimbabwe have been deconsolidated as Massmart cannot be said to be controlling the day-to-day management of that business following legislative changes in that country. Control is defined as ‘the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities’. The financial effect of this exclusion is minimal.


The Group has medium-term financial targets or measures that we believe represent optimal performance levels within the income statement, balance sheet, or the combination of both. Certain of these targets are ’stretch targets’ that will only be achieved in the medium term. These targets are also ‘through-the-cycle’ targets, meaning that during a strongly negative or positive economic environment, we may under- or over-perform against those targets.



The financial targets are intended to apply in a benign to positive economic environment, ie one representing the ‘average’ growth rate of an economic cycle.

These target ratios are shown below:

Medium-term target ratios Definition
ROS > 5.5% Return on sales (ROS) is the ratio of profit before tax,
  excluding foreign exchange amounts, to sales
ROE > 35% Return on equity (ROE) is the ratio of headline earnings
  to average ordinary shareholders’ equity
Gearing < 30% Gearing is the ratio of average long-term interest-bearing
  debt to average ordinary shareholders’ equity
Dividend cover of x1.7 Dividend cover represents the ratio of headline earnings
  to dividends paid to ordinary shareholders


This ratio combines all the key income statement elements, being sales, gross margin, supplier income, expenses (including depreciation and amortisation) and net interest, but excludes foreign exchange translation gains or losses. Every key financial aspect of the retail or wholesale business model is therefore captured in this ratio. In addition, the largest asset investment in the Divisions is net working capital (being inventory and trade receivables), less the associated funding liability (in trade payables). The relative success of management’s impact on net working capital will therefore be reflected in changed net finance charges or receipts from one year to the next. The reason foreign exchange translation gains or losses are excluded is because they are largely well beyond management’s control, are volatile, and do not reflect the sustainable profitability of the Division or Group.

  Actual Medium- International
Medium-term trading targets (%) 2010 term target benchmark
Massdiscounters 5.7 8.0 7.4
Masswarehouse 6.6 7.0 5.0
Massbuild 4.8 7.0 – 9.0 10.0
Masscash 2.9 3.0 3.0
Corporate (0.6) (0.5)
Massmart Group 4.2 5.5

As a Division reaches new levels of trading or operating efficiency that we believe are permanent, then that Division’s target ROS may be increased. The Group’s target ROS is derived by applying each Division’s target ROS to its actual sales.

  • Given the difficult economic and trading environment to June 2010, it is unsurprising that all Divisions are currently operating well below their target, and previously achieved, ROS levels.
  • Although Masswarehouse is operating just below its medium-term ROS target, and has operated above this level in previous years, the aggressive store opening programme of at least one new store per year for the next four years makes it possible that profitability may not improve in this Division during this time.
  • Massbuild’s higher relative cyclicality compared to the rest of the Group required the introduction of a target range, where the lower-end applies in a cyclical downturn while the upper-end applies in a positive environment.
  • Masscash was below its target through a combination of the adverse effects of deflation in Food during the year and the positive effect of the inclusion of higher net margin Retail Cash and Carry stores. Masscash’s Wholesale business will always be vulnerable to a deflationary Food environment while, in contrast, it will tend to outperform in a high Food inflation environment.
  • The Corporate portion refers to the net interest charge that would accompany the targeted average debt level for the Group, as well as the BEE IFRS 2 charge and asset impairments.

Progress to date – Massmart’s current ROS is 4.2% (2009: 4.6%). With the exception of the 2009 and 2010 financial years, Massmart has grown its ROS every year since 2000 and we believe that the target of 5.5% remains achievable in the medium term.


Massmart is committed to delivering superior returns to shareholders. The Group’s medium-term targets are to exceed a 35% return on average ordinary shareholders’ equity.

The decline in the Group’s profitability (measured by ROS) in 2009 and 2010 during the economic recession, was the main cause of the decline in the Group’s return on shareholders’ equity. This was also affected by the Group’s ongoing investment in new stores and new businesses which increased the size of the balance sheet. As the Group’s profitability improves, and as the new stores and business begin to trade optimally, the return on shareholders’ equity will improve to its previous higher levels.

Progress to date – Massmart’s current return on average shareholders’ equity is 34.9% (2009: 41.7%).

The Divisions are responsible for delivering operational returns, being the returns to their net working capital and non-current assets excluding goodwill and trademarks. In addition to these operational returns, Massmart, through the Board and Executive Committee, is responsible for delivering investment returns that will also include the book value of intangibles (specifically goodwill arising from acquisitions), as well as setting the Group’s gearing levels that will influence returns to shareholders and the overall risk profile. Depending upon the purchase price, retail and wholesale acquisitions tend to generate significant accounting goodwill owing to the relatively low net asset values of these business models.

The Divisions are recapitalised annually by Massmart with non-interest-bearing shareholders’ funds that are equivalent to the book value of long-term assets in each Division. Each therefore must fund its net working capital position through cash or interest-bearing debt, depending upon the characteristics of that business model. This process enables divisional returns to be evaluated and compared on a consistent basis across the Group, and from one year to the next. This policy has not been rigidly applied in Masscash owing to minority shareholders in that business.


Massmart prefers some gearing, up to a maximum of 30%, in order to leverage the return on shareholders’ equity but without introducing excessive financial risk to the Group. Given the Group’s high cash generation and our historical preference for leasing rather than owning our stores, it is difficult to permanently or meaningfully gear (ie maintain a net interest-bearing debt position) the Group over the long term. It should be noted here however, that our stores’ lease obligations represent a significant form of permanent gearing (these lease obligations currently represent a discounted present value of approximately R4.6 billion (2009: R4.7 billion).

2010 2009
Gearing 17.9% 12.4%
Average interest-bearing debt for the year 583.8 360.1
Average capital and reserves 3,262.2 2,895.3

Average interest-bearing debt is calculated by grossing up the net interest paid of R46.7 million (2009: R48.6 million) by the average interest rate of 8.0% (2009: 13.5%).

Recently the Group has decided to own rather than lease certain of its larger stand-alone store formats, specifically Makro and Builders Warehouse, and this will add incrementally to the Group’s gearing. Essentially however, this change does not represent a major financial shift, as all it will be doing is converting a fixed long-term lease commitment, which is recorded off-balance sheet, to an on-balance sheet asset and liability. As regards financing any acquisitions, depending on the target company’s cash profile and cash generation ability, this gearing ratio may be increased, but probably to no higher than 50%.

As the period-end balance sheet tends to be unrepresentative of the Group’s average net cash or debt position during the year (showing higher cash balances as monthly creditors are paid after month-end), the Group’s gearing levels are best calculated using the net interest paid (or received) for the period.

Progress to date – the Group’s gearing was 17.9% (2009: 12.4%) for the financial year.

Store progress

Opening balance 256
Game stores opened 7
Amanzimtoti (KwaZulu-Natal)  
Ballito (KwaZulu-Natal)  
Alberton (Gauteng)  
Lenasia (Gauteng)  
Mokopane (Limpopo)  
Nelspruit (Mpumalanga)  
Phuthaditjhaba (Free State)  
Game stores closed -3
Wynberg (Gauteng)  
Nelspruit (Mpumalanga)  
Nelspruit CBD (Mpumalanga)  
DionWired stores opened 5
Hyde Park (Gauteng  
Grove (Gauteng)  
Woodlands (Gauteng)  
Nelspruit (Mpumalanga)  
Somerset West (Western Cape  
Builders Warehouse stores opened 2
Bedworth Park (Gauteng)  
Kempton Park (Gauteng)  
Builders Express store opened 1
Stellenbosch (Western Cape)  
Builders Express stores acquired 3
Shelley Beach (KwaZulu-Natal)  
Umhlanga (KwaZulu-Natal)  
Norwood (Gauteng)  
Builders Trade Depot store opened 1
Ballito (KwaZulu-Natal)  
Builders Trade Depot store acquired 1
Willowvale (Eastern Cape)  
Builders Trade Depot stores closed -3
Durban (KwaZulu-Natal)  
Witbank (Mpumalanga)  
Somerset West (Western Cape)  
CBW stores opened 2
Durban (KwaZulu-Natal)  
Isipingo (KwaZulu-Natal)  
CBW stores acquired 16
Port Elizabeth (Eastern Cape)  
Willowvale (Eastern Cape)  
Roodepoort (Gauteng)  
Roodepoort (Gauteng)  
Newtown (Gauteng)  
Soweto (Gauteng)  
Soweto (Gauteng)  
Johannesburg CBD (Gauteng)  
Johannesburg CBD (Gauteng)  
Pretoria (Gauteng)  
Mokopane (Limpopo)  
Tzaneen (Limpopo)  
Piet Retief (Mpumalanga)  
George (Western Cape)  
Mossel Bay (Western Cape)  
Manzini (Swaziland)  
Total stores in 2010 288


Massmart’s current dividend policy is to pay total annual cash distributions representing a x1.7 dividend cover ratio, unless circumstances dictate otherwise. The reference point for the calculation is headline earnings, which includes the effect of the Thuthukani IFRS 2 charge and associated dividend. No adjustment will be made to the dividend calculation for the unrealised or non-cash portion of any foreign exchange translation gain or loss, unless the figures become very material.

This ratio is not a target – because it is already being achieved – but is disclosed to give shareholders clarity on future dividend levels. The Board believes that this dividend cover ratio is appropriate given the Group’s current and forecast cash generation, planned capital expenditure and gearing levels.

This financial year however, the Board resolved to maintain the dividend at the same level as 2009, despite this dividend policy and marginally lower headline earnings. The dividend cover for the 2011 financial year will revert to the original policy of x1.7 dividend cover.

The Board has no desire to build up a permanent cash reserve and so will, where practical, reduce dividend cover and/or may execute a share buyback – depending upon the current share price and our view of its valuation – in order to return surplus cash to shareholders.

Historical dividend cover ratios:

  2010 2009 2008 2007 2006 2005 2004 2003
Dividend Cover x1.46 x1.55 x1.70 x1.70 x2.00 x2.00 x2.00 x2.50


Massmart’s Black Economic Empowerment (BEE) staff equity issue became effective from October 2006. Full details on this BEE staff equity issue were published in the June 2006 shareholders’ circular but the main financial points are repeated below:

  • Equity representing 10% of the Massmart ordinary issued shares, pre-dilution, or 9.1% post-dilution, was issued.
  • There were two categories of participant, being general staff and scarce skills, and separate trusts were formed for both.
  • Although the underlying instrument is effectively an option with a strike price of R49.98, the actual legal instruments are two classes of preference shares. The reason preference shares were used was to give the participants voting rights and, in one case, a right to dividends as explained below:
  • The first category, ‘A’ preference shares, was a once-off issue to the Thuthukani Empowerment Trust, for the benefit of all 14,500 permanent employees in the Group at that time. These shares have voting rights equal to those of ordinary shares and have a right to dividends on the following basis: 25% of the ordinary dividend in year one (being 2007), 50% of the ordinary dividend in year two (2008), 75% of the ordinary dividend in year three (2009), and 100% of the ordinary dividend in year four (2010) and thereafter. These ‘A’ preference shares are converted into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in three equal annual tranches commencing on 1 October 2010.
  • The second category, ‘B’ preference shares, was issued to the Black Scarce Skills Trust for the benefit of current and future black managers in the Group – and so there will be ongoing issues from this trust. These shares have voting rights but do not attract dividends. These shares can convert into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in four equal annual tranches commencing from the end of the second year of the issue date.

At October 2006, the total IFRS 2 Share-based Payment charge arising from this BEE staff issue was R373 million. In terms of IFRS 2, this amount must be amortised over the life of the scheme, being six years, commencing from October 2006. The current year’s charge was R69.7 million (2009: R66.9 million) and the charge for 2011 is anticipated to be R64.2 million. Current South African tax legislation does not allow any tax deduction associated with this non-cash charge.

Using the total IFRS 2 charge of R373 million at October 2006 relative to the Group’s market capitalisation at the same date, suggests that the total likely dilution to ordinary shareholders of this transaction will only be 3.3%. This total, however, does not take into account forfeitures by employees which will reduce the dilution effect.


  2010 2009  
  Rm Rm % change
Sales 47,451.0 43,128.7 10.0
Gross profit 8,571.7 7,777.7 10.2
Gross margin 18.1% 18.0%  
Other income 99.6 103.1 (3.4)
Expenses (6,640.3) (5,851.8) (13.5)
Operating expenses as a % of sales 14.0% 13.6%  
Trading profit 2,104.4 2,097.5 0.3
Trading profit as a % of sales 4.4% 4.9%  
Foreign exchange loss (164.3) (78.4)  
Operating profit 1,866.7 1,950.6 (4.3)
Operating profit as a % of sales 3.9% 4.5%  
Finance costs (92.6) (112.8) 17.9
Finance income 45.9 64.2 (28.5)
Net finance costs (46.7) (48.6) 3.9
Profit before taxation 1,820.0 1,902.0 (4.3)
Profit before taxation as a % of sales 3.8% 4.4%  
Taxation (608.2) (620.4) 2.0
Profit for the year 1,211.8 1,281.6 (5.4)
Headline earnings:      
Including foreign exchange 1,138.6 1,207.1 (5.7)
Excluding foreign exchange 1,256.9 1,263.5 (0.5)
Headline earnings per share (cents):      
Including foreign exchange 567.2 605.0 (6.2)
Excluding foreign exchange 626.1 633.3 (1.1)

Read more

More detail on the consolidated income statement and related notes can be found in

Group Financial Statements

Read more

More detail on the operational performance can be found in

Operational Review


The Group’s average product selling price inflation rate, using the Group’s sales mix, for the 2010 financial year was -0.4%, ie deflation. An indication of the economic volatility recently experienced in South Africa is that this equivalent figure for 2009 was 11.4%. Inflation/deflation for each of the Group’s major product categories is shown in the table alongside.

Group product inflation -0.4%
Food and Liquor 1.4%
Home Improvement 1.8%
General Merchandise -5.3%

As noted in previous years, dramatic changes in product inflation beyond an approximate range of 5.0% – 8.0% are inevitably linked to significant changes in the Rand exchange rate. The recent strengthening of the Rand exchange rate caused disinflation (ie declining inflation) and ultimately deflation in both Food and General Merchandise.

Looking ahead to 2010/11, due to the stronger Rand there appears to be still some general downward pressure on product prices. South African core cost inflation however, remains at 5.0% – 8.0% and inevitably these cost pressures will feed into product prices.

Total sales of R47.5 billion increased by 10.0% over 2009. Comparable stores’ sales growth was 2.6% while non-comparable stores including acquisitions added 7.4%. With the Group’s average product inflation rate of -0.4%, the low comparable sales growth still represented volume growth of about 3.0%.

During the 2010 financial year, the Group opened 18 new stores, closed or sold six stores, and acquired 20 stores, thereby increasing its trading area by an unweighted 8.5% to 1,179,466m².


Comparable sales

Comparable sales are sales figures quoted for stores that have traded, and will trade, for all 12 months of both the current and prior years. These stores’ sales would therefore exclude new store openings or closings in the current and prior years.


New space has not been proportionately adjusted if the store was only open for part of the fi nancial year.


The Group’s gross margin of 18.06% is slightly above the prior year’s 18.03% due to a combination of lower gross margins in Massdiscounters, Makro and Masscash, and higher gross margins in Massbuild. The lower gross margins in Massdiscounters were due to sales mix as value-seeking customers purchased predominantly lower-margin promotional product, while Food deflation compressed margins in Makro and Masscash. The higher gross margin in Massbuild was mainly due to much less merchandise clearance activity in 2010 compared to 2009.

The Group’s gross margin is dependent upon the sales mix across the Divisions and the required trading aggression occasioned by competitor activity. In a positive economic cycle, it should increase marginally owing to the increased contribution from the higher-margin Massbuild division. Gross profit includes rebates and other forms of income earned from suppliers as well as ongoing revenue from sales of cellular products and airtime.


Other income of R99.6 million (2009: R103.1 million) comprises royalties and franchise fees from in-store third parties, property rentals, investment income excluding interest, and sundry third party management and administration fees.


  2010 2009  
  Rm Rm % change
Depreciation and amortisation (382.8) (343.1) (11.6)
Impairment of assets (3.7) (1.6) (131.3)
Employment costs (3,352.9) (2,965.8) (13.1)
Occupancy costs (1,326.7) (1,170.4) (13.4)
Other operating costs (1,574.2) (1,370.9) (14.8)
Total expenses (6,640.3) (5,851.8) (13.5)



Employment and occupancy costs together represent 70% of the Group’s total expenses.

Total expenses represent 14.0% of sales, a decline compared to the prior year’s 13.6% of sales. Although total expenses increased by 13.5%, comparable expenses increased by only 2.8% demonstrating the Divisions’ ability to control costs when the trading environment demanded it. The major expense categories and significant expenses included in total expenses are discussed in more detail below.

Employment costs, the Group’s single largest cost category at 50.5% of total expenses, are 13.1% higher than the prior year. On a comparable basis, these costs increased by 5.0%. Included in employment costs are IFRS 2 Share-based Payments charges of R149.4 million (2009: R133.5 million) which arise from shares and options issued to beneficiaries of the Massmart Employee Share Trust, the Thuthukani BEE Staff Scheme and Black Scarce Skills Trust. Excluding these IFRS 2 charges, total employment costs are 13.0% higher than the prior year. The Group employed 8.4% more employees (on a full-time equivalent basis or FTE) compared to 2009, increasing from new stores and acquisitions.

For the forthcoming financial year, the Group’s salary increases are between 6% and 8% and the wage increases, which have all been finalised, are in a range of 7% and 8%.

Occupancy costs, the Group’s second biggest operating cost at 20.0% of total expenses, increased by 13.4%. On a comparable basis, these costs increased by 5.4%. Expressed as a percentage of sales, occupancy costs, at 2.8% are higher than the prior year equivalent of 2.7%. Property lease costs comprise only 69% of this total cost, the balance comprises associated property costs including municipal rates and services. Property lease costs increased by 12% while the balance of the expenses in this category increased by approximately 18% due to significantly increased municipal rates and service fees.

The lease-smoothing accounting policy applicable to operating leases (thereby affecting all store leases) has the effect of keeping comparable-store lease charges broadly equal from one year to the next, and so any increase in property lease costs between the years would be from new stores. Another effect of this accounting policy is that annual lease escalations no longer increase the Group’s lease charge. Adjusting for the non-cash lease-smoothing adjustment in both years shows that annual cash occupancy costs increased by 15.6% and total net trading space increased by 8.5%.

Depreciation and amortisation is the Group’s third largest cost category at 5.8% of total expenses. Owing to ongoing store refurbishments and new stores, the depreciation and amortisation charge increased by 11.6% which is ahead of sales growth, and will continue to increase ahead of sales growth due to the Group’s capital expansion programme. Most Divisions refurbish their stores on a regular basis, resulting in steadily higher depreciation charges.

The three major cost categories described above represent 76.3% of the Group’s total expenses. Other operating costs represent every other item of expense in the Group, including for example: insurance, bad debts, travel, professional fees, advertising and marketing, stationery and consumables. Combined, this category represents the most manageable, or variable, costs and so while total costs in this category increased by 14.8%, comparable costs increased by only 2.8% due to intense management focus. It is unlikely that this level of cost-containment will be sustained and so this category will increase at a level approximating national inflation rates.


As noted in the summarised income statement above, included in operating profit is a net unrealised loss on foreign currency transactions and translations of R164.3 million (2009: net loss of R78.4 million). The translation of Massdiscounters’ African balance sheets accounted for R64.2 million of this (2009: R106.6 million loss), there was a net loss from other foreign monetary balances of R51.1 million (2009: R24.0 million gain) and the balance came mostly from unrealised losses on landed forward foreign exchange contracts of R49.0 million (2009: R4.2 million gain).

More detail is provided in note 7 and note 39 on the nature of the Group’s foreign currency exposure, particularly with regard to Massdiscounters’ African stores.

When a new store is opened, large once-off or exceptional operating costs can be incurred in preparing the store (including temporary staff, marketing initiatives, special promotions, signage, amongst others). These costs are referred to as store pre-opening costs and in 2010 amounted to R35.9 million (2009: R33.8 million).


Group trading profit, which is shown before accounting for the foreign currency translation movements, grew by 0.3% which is a great performance relative to the tough trading environment experienced for almost half of the 2010 financial year. Expressed as a percentage of sales, Group trading profit deteriorated from 4.9% to 4.4%. Group operating profit, which includes the foreign currency translation movements, was 4.3% below the prior year.

The Group’s financial performance has been covered in detail above, but can broadly be summarised as:

  • Total sales boosted by new stores and acquisitions during the year;
  • Low comparable sales due to a difficult trading environment and very low product inflation;
  • Lower gross margins in Massdiscounters, Makro and Masscash, and higher gross margins in Massbuild;
  • Great cost control across the entire Group; and
  • Therefore only one Division, Massbuild, holding its operating profit margins above the prior year.


Although average Group gearing was higher than 2009, net interest paid was below the prior year due to lower commercial interest rates.

Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared for the next three to four years. Using net interest paid as a proxy, the Group’s average net gearing for the 2010 financial year was 17.9% (2009: 12.4%).


The total tax charge represents an overall tax rate of 33.4% (2009: 32.6%). For several years two factors have caused the Group’s tax rate to be higher than the standard South African corporate rate, the first is the charge from the Secondary Tax on Companies (STC) payable on net dividends paid, and the second is the effect of significant non-deductible expenses, specifically the IFRS 2 charge. In the current year, STC added 4.6% (2009: 3.8%) to the tax rate while the non-deductible IFRS 2 charge had a further adverse effect of 2.3% (2009: 2.0%).

Excluding the impact of STC and IFRS 2, we expect Massmart’s future effective tax rate to be at or near the South African corporate rate of 28.0%, although higher tax rates in certain foreign jurisdictions may marginally increase this.

Massmart is unconcerned at any specific element of historical tax risk in the Group, but there remains the uncertainty that material adjustments arising from potentially unfavourable tax assessments of previous tax returns, some of which have not yet been assessed by SARS, could impact future tax charges. Extending this uncertainty is that SARS can reopen any tax assessment within three years of issuing such assessment.

Taxation reconciliation

South African corporate taxation  
28.0% in 2009 28.0%
Secondary Tax on Companies  
+3.8% in 2009 +4.6%
IFRS 2  
+2.0% in 2009 +2.3%
-1.2% in 2009 -1.5%
Overall tax rate  
32.6% in 2009 33.4%
Total tax charge  
R620.4 million in 2009 R608.2m


Headline earnings of R1,138.6 million (2009: R1,207.1 million) are 5.7% lower than the prior year. Adjusting for the after-tax effect of the foreign currency translation movement, increases revised headline earnings to R1,256.9 million (2009: R1,263.5 million) representing a decline of only 0.5%.

Headline earnings per share (HEPS) of 567.2 cents is 6.2% lower than the 2009 HEPS of 605.0 cents. Adjusting for the after-tax effect of the foreign currency translation movement, increases revised HEPS to 626.1 cents (2009: 633.3 cents) representing a decline of 1.1%.

After adjusting for the potential future conversion of 9.07 million shares (2009: 4.52 million shares), the diluted HEPS is 542.7 cents (2009: 591.6 cents). Under the calculation required by IFRS, the number of potentially dilutive shares has increased due to the significantly higher weighted-average Massmart share price during this financial year.


  2010 2009
  Rm Rm
Non-current assets 4,974.9 4,397.5
Current assets 9,314.5 8,129.4
Total assets 14,289.4 12,526.9
Equity and liabilities    
Capital and reserves 3,469.7 3,054.7
Minority interest 122.1 42.0
Total equity 3,591.8 3,096.7
Non-current liabilities 895.3 858.3
Current liabilities 9,802.3 8,571.9
Total equity and liabilities 14,289.4 12,526.9

This review covers the consolidated balance sheet and the related notes.


  2010 2009
  Rm Rm
Non-current assets 4,974.9 4,397.5
Property, plant and equipment 2,055.2 1,696.6
Goodwill 1,875.0 1,588.2
Other intangibles 220.8 159.2
Investments 315.3 277.6
Other financial assets 270.3 256.7
Deferred taxation 238.3 419.2

Property, plant and equipment and goodwill together represent 79.0% (2009: 74.7%) of the Group’s total non-current assets.

Massmart continually refurbishes older stores and is building new stores, and so during this year expenditure of R520.1 million (2009: R598.9 million) was spent on property, plant and equipment. Of this, R191.6 million (2009: R295.4 million) was replacement capital expenditure, while the balance of R328.5 million (2009: R303.5 million) was invested in new capital assets, including new stores. Acquisitions added a further R205.8 million (2009: R33.0 million) to Group property, plant and equipment.

Goodwill increased by R286.8 million, primarily reflecting the goodwill arising from this year’s acquisitions (R305.8 million). Under IFRS all goodwill must be tested annually against the value of the business units with which it is associated and, if overstated, that goodwill must be impaired. No goodwill impairment was necessary this year or in the prior year.

Other intangibles primarily represent computer software that IFRS requires to be disclosed in this category. In terms of IFRS the depreciation charge arising from this asset category is classified as an amortisation charge.

Capital expenditure for 2011 is budgeted to be R910 million and includes R87.5 million for the new Makro store and the investment in 29 other new stores to be opened during the 2011 financial year, representing new space growth of about 8.0%.


Investments comprise mainly a R223.6 million (2009: R196.7 million) investment in an international treasury, shipping and trading business unit, revalued to reflect the foreign-denominated net assets within that business unit. The R60.8 million (2009: R52.4 million) shown as a bare dominium revaluation represents the Group’s proportionate share of the estimated market value of the right to acquire bare dominiums in certain Makro stores.

Other financial assets of R270.3 million (2009: R256.7 million) include executive and employee loans of R216.1 million (2009: R198.9 million) owed by participants in the Massmart employee share purchase trust that attract zero percent interest. This loan amount reduces as employees sell their shares and repay the associated loans, and increases where executives elect to own Massmart shares, funded with these loans, rather than options issued by the trust. The finance lease deposit of R51.1 million (2009: R51.8 million) is related to the financing of the Makro Strubens Valley store built in 2003.


The deferred tax asset arises primarily from numerous temporary differences, including tax deductions on trademarks, the operating lease liability arising from the lease-smoothing accounting policy, and unutilised assessed losses. This net asset will reduce over time as the associated tax benefits are utilised.


  2010 2009
  Rm Rm
Current assets


Inventories 5,601.5 4,893.2
Trade, other receivables and prepayments 2,322.6 1,851.1
Taxation 22.1 329.3
Cash and bank balance 1,368.3 1,055.8

Net inventories represent approximately 52.6 days’ sales (using the historic basis), a slight deterioration on the prior year’s figure of 50.5 days. Given the strong sales growth in Massdiscounters, particularly Game South Africa, and Builders Warehouse, these Divisions have increased their inventory levels.

In general, Massdiscounters, being a retail discounter with 102 stores, has the highest inventory levels and its sales days in inventory are almost double those for Massmart’s wholesale businesses (Makro and Masscash). Builders Warehouse also has higher inventory days than the Group average, given the broader and deeper merchandise range in its stores.

General Merchandise net inventory of R2,468.5 million (2009: R2,362.8 million) represents almost half of total Group inventory, while Food net inventory at R1,647.6 million (2009: R1,429.0 million) is the second largest Group inventory category but has the fastest stock-turns. This inventory category has increased due to the Retail Cash & Carry stores acquired in Masscash. Home Improvement net inventory levels have increased from the new stores in that Division and higher sales growth.

Total trade and other receivables and prepayments, net of provisions, is 25.5% higher than the prior year’s figure. Included here are net trade accounts receivable of R1,216.2 million (2009: R1,077.6 million), which increased by 12.9%. Although trade credit is offered to certain customers in Massbuild and in Masscash, it is well-controlled, insured with a credit risk insurer, and kept within the Group’s parameters, and does not affect the Group’s working capital. The improved situation is also reflected in lower allowances for doubtful debts at year-end, which reduced from 4.7% of total trade receivables to 4.4% at June 2010.

For more detail, refer also to the commentary on credit risk in the Financial risks section in note 39.


  2010 2009
  Rm Rm
Non-current liabilities 895.3 858.3
Non-current liabilities:    
– Interest-bearing 385.8 149.7
– Interest free 423.5 504.4
Non-current provisions 66.6 55.7
Deferred taxation 19.4 148.5

Major items included in the total of R895.3 million (2009: R858.3 million) are medium-term bank loans, capitalised finance leases, the operating lease liability arising from the lease-smoothing adjustment, non-current provisions and deferred tax.

Non-current interest-bearing liabilities are medium-term bank loans and this balance increased during the financial year as a new R500 million three-year amortising loan was raised. Interest is fixed on this loan at 9.8%. The two five-year amortising loans of R250 million each were originally raised during the 2006 financial year to finance the Massbuild acquisitions and interest on both loans is fixed at 8.8% and 8.7% respectively. These loans will be paid-down during the 2011 financial year.

Capitalised finance lease balances are R76.7 million (2009: R86.3 million).

The largest balance in non-current non-interest-bearing liabilities is the operating lease liability of R422.8 million (2009: R463.6 million) arising from the lease-smoothing accounting policy and which will be released over the remaining period of the Group’s operating leases.

Included in non-current provisions is the long-term provision of R58.3 million (2009: R55.1 million) arising from the actuarial valuation of the Group’s liability arising from post-retirement medical aid contributions owed to current and future retirees. This liability is unfunded. With effect from 1999, post-retirement medical aid benefits were no longer offered to new employees joining the Group.

The deferred tax liability arises primarily from prepayments and property, plant and equipment.


  2010 2009
  Rm Rm
Current liabilities 9,802.3 8,571.9
Trade and other payables 9,194.3 7,670.3
Provisions 25.8 22.2
Taxation 201.9 490.4
Other current liabilities 322.9 358.3
Deferred taxation 57.4 30.7

Included in the total trade and other payables figure are trade payables of R7,329.0 million (2009: R6,128.2 million) representing approximately 60 days of cost of sales (using the historic basis), which is higher than the prior year’s figure of 56 days. As noted earlier, owing to payments to creditors being made shortly after each month-end, the Group trade payables balances at year-end are not representative of the average during the remaining financial period. The amount by which the year-end trade payables is overstated in comparison to the average cannot be accurately calculated but is approximately R1.5 billion.

The current taxation liability reflects the Group’s liability for provisional corporate tax payments that are generally payable within a few days of the financial year-end.

Major items in Other current liabilities include R217.9 million (2009: R129.3 million) being the short-term portion of the medium-term loans noted above.


The ‘waterfall’ graph alongside illustrates the cash generated by the Group and then how the cash was applied. Free cash flow is commonly used in business to describe the cash ‘residue’ with which the Board can decide to either invest in further growth and/or return the cash to shareholders as dividends or share buybacks, and in 2010 the Group’s free cash flow was R1.8 billion (2009: R1.4 billion).


Cash flow analysis

Working capital movements can be volatile. Depending upon creditor payment cycles the extent of the movement tends to be overstated at month- and year-end and so is generally not indicative of the intra-year average

‘Trading’ represents ‘Operating cash before working capital movements’

‘Free cash flow’ represents cash inflow from ordinary trading, before cash outflow relating to the expansion or contraction of the business

Read more

More detail on the consolidated statement of cash flows can be found here

Group Financial Statements


Cash flow from operating activities
  2010 2009



Cash flow from operating activities    
Operating cash before working capital movements 2,346.8 2,398.2
Working capital movements 292.6 63.8
Cash generated from operations 2,639.4 2,462.0
Interest received 45.9 64.2
Interest paid (92.6) (112.8)
Investment income 36.1 42.9
Taxation paid (552.8) (700.3)
Dividends paid (822.4) (867.4)
Net cash inflow from operating activities 1,253.6 888.6

Cash generated from operations is higher than the prior year figure and is higher than this year’s operating profit before depreciation, amortisation and impairment of R2,417.5 million (2009: R2,373.7 million), demonstrating the fundamental cash underpin to Massmart’s earnings.

Cash taxation paid decreased owing to lower taxable income in 2010 and some timing differences on tax payments.

The total cash dividend paid is lower than the prior year figure due to there having been treasury shares owned by the Group for part of the current financial year.

  2010 2009
Cash flow from investing and financing activities Rm Rm
Cash flow from investing activities    
Investment to maintain operations (284.0) (354.5)
Investment to expand operations (346.1) (340.1)
Proceeds on disposal of property, plant and equipment 6.2 9.0
Proceeds on disposal of assets classified as held for sale 174.3
Investment in subsidiary (369.9) (198.5)
Disposal of subsidiary 26.9 4.3
Other investing activities (163.8) 8.1
Net cash outflow from investing activities (1,130.7) (697.4)
Cash flow from financing activities    
Net cash outflow from financing activities 193.8 (160.7)
Net decrease in cash and cash equivalents 316.7 30.5
Foreign exchange movements taken to statement of changes in equity (30.9) (27.3)
Cash and cash equivalents at the beginning of the year 1,025.1 1,021.9
Cash and cash equivalents at the end of the year 1,310.9 1,025.1

Total capital expenditure (replacement and expansion) was R630.1 million, a slight decline on the prior year’s total of R694.6 million.

In 2009, the R174.3 million proceeds on disposal of assets classified as held for sale are from the sale of the Massdiscounters consumer credit book and business, effective on the first day of that financial year.

The Investment in subsidiaries has been described in more detail in the Acquisitions paragraph..


Read more

More detail on financial risks and sensitivity analyses can be found here

Group Financial Statements

Liquidity risk

Liquidity risk is considered low owing to the Group’s conservative funding structure and its high cash generation. Massmart’s liquidity requirements are continually assessed through the Group’s cash management and treasury function.

The Group has total banking facilities, incorporating overnight, short- and medium-term borrowings, letters of credit, forward exchange contracts and electronic fund transfers, of R4,266.5 million (2009: R2,548.0 million). As at June 2010, total interest-bearing debt amounted to R708.7 million (2009: R388.0 million).

As the Group begins to build inventory levels for the festive season, net interest-bearing debt will increase up to a maximum of approximately R2.0 billion in October/ November, but will reduce rapidly as Christmas and year-end trading accelerates with commensurately higher cash proceeds.

Interest risk

Interest rate exposure is actively monitored owing to the Group’s significant intra-month cash movements and the seasonal changes in its net funding profile during the financial year. As noted above, interest rates on the three medium-term bank loans are fixed at 8.8%, 8.7% and 9.8%, respectively.

Of the Group’s total financial liabilities of R9.9 billion, 93% or R9.2 billion of this is represented by non-interest-bearing trade and other payables funding.

Credit risk

Credit is available to wholesale customers at Makro, Massbuild and Masscash, and is adequately controlled by using appropriately trained personnel, applying credit granting criteria, continual monitoring and the use of software tools. A portion of the trade debtors book in Masscash is insured and a further portion is secured through general notarial bonds, pledges and other forms of security. Similarly, the trade debtors books in Builders Warehouse and Trade Depot are also insured.

Currency risk

Where possible and practical, currency risk in the Group is actively managed. All foreign-denominated trading liabilities are covered by matching forward-exchange contracts. At financial year-end, there were open forward exchange contracts totalling R699.9 million (2009: R377.3 million) of which 99.5% (2009: 97.9%) were US Dollar liabilities.

The sensitivity of the Group to this exposure is shown in note 39. In brief, if the Rand strengthened by 5% from the year-end rate of R7.67/US Dollar, there would be a R6.7 million charge, while a 5% weakening would give rise to a R6.7 million gain (2009 equivalent figures were R1.3 million).

Foreign-denominated assets are not covered by forward exchange contracts, as these are permanent assets held for the long term.

The Group’s exposure to the African currencies has been explained in note 7  and further detail on the sensitivity analysis can be found in note 39.


The appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied.

Read more

The detailed technical review can be found here

Group Financial Statements

The Group’s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board. Guidance has been obtained from IFRICs and circulars effective on 6 October 2010. Owing to the nature and volume of Exposure Drafts (EDs), no review has been provided except for the lease exposure draft specifically discussed in note 2.

The Group believes that accounting standards set the minimum requirement for financial reporting. The financial statements in this annual report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.



XBRL eXtensible Business Reporting Language

XBRL is a language for the electronic communication of business and financial data which may revolutionise business reporting around the world.



Dictionaries used by XBRL. They define the specific tags for individual items of data (such as ‘profi t’). Different taxonomies will be required for different financial reporting purposes. XBRL SA requires their own financial reporting taxonomies to reflect the South African local accounting regulations.

XBRL is becoming a standard means of communicating information between businesses and on the internet. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data.

In South Africa, the development and drive for adoption is done by XBRL SA, a not-for-profit organisation. Members include large corporate organisations, audit firms, regulators and accounting software vendors. The main purpose of this organisation is to create awareness within the South African market, while the members contribute to the development of taxonomies relevant specifically to South African reporting requirements (JSE Listings Requirements, Companies Act Fourth Schedule disclosure requirements, etc).

A few reasons for the slow acceptance in South Africa is that too few people have XBRL experience, software companies are not promoting XBRL and regulators cannot receive information in XBRL format. Given the world-wide growth of XBRL over the past decade, the growing acceptance of IFRS and increased globalisation of business, it is inevitable that South Africa will follow. It is expected that the road to adoption of XBRL in South Africa will be started with a voluntary filing programme and later, companies will be mandated to use XBRL as a format for filing purposes.

Massmart has not yet implemented XBRL, but intends to do so in time.


The Board has formally considered the going-concern assertion for Massmart and its subsidiaries and believes that it is appropriate for the forthcoming financial year. See here for more detail.


As always, I would like to acknowledge and pay tribute to the high-quality performances and significant efforts invested by my financial colleagues and their teams at all the Massmart Divisions and at the Massmart corporate office.

Guy Hayward

Guy Hayward
Chief Financial Officer

6 October 2010

back to top